MARCH 7, 2019 By DENIS OAKLEY
To disrupt an industry or traditional business model you need a number of pre-conditions that include:
· technological innovations, that
· are widely known, and
· have thousands of new entrants building businesses, and
· one discovers a business (not technological) innovation that allows them to consolidate
David Seidman makes a good point referencing Michael Porter. We can make it an even simpler model.
Most markets exist in a state of equilibria or a slow changing state. How the players act remains roughly the same over a long period of time. Market share changes through mergers and acquisitions rather than through new offerings.
Market disruption when a force happens to move the equilibria from being relatively stable to quite unstable.
We see this most frequently when new technology is introduced.
The Waterwheel Disrupted Mediaeval Farming
The watermill and the printing press both disrupted Europe massively. As peasants saw the possibility of water mills for processing grain and reducing their costs and labour there was a huge building boom. This was sufficient to slow the flow of some rivers as so much kinetic energy was being extracted.
The Printing Press
Likewise the introduction of the printing press by Gutenberg et al disrupted the mediaeval copy shops who duplicated manuscripts by hand (whether monastic or secular).
If you look at both cases what are the similarities?
In both cases tens of thousands of entrepreneurs entered the market in the decade and the centuries after the invention/discovery. The disruption was caused in part by the technology, but to a much larger extent by the thousands and thousands of actors who realised the impact of the technology.
Let’s move a few centuries forward. We see similar massive changes to economies and societies with the invention of canals, railroads and oil.
The difference between the 19th century and the later mediaeval period was the evolution of the corporation and the ability to raise capital with less risk at a vastly larger scale.
Canals weren’t built by people. They were built by startups organised and funded for that purpose. In the UK, the canals disrupted the turnpike system and made it possible to economically move bulk materials long distances. This had been possible back in the time of Stonehenge and the Pyramids but at significant social and economic cost. Now you could move wrought iron from Coalbrookdale to Walsall in days, all for the cost of a reusable boat and the wages of a man and some mules.
Again England was not transformed by the technology. It was transformed by the flood (sorry) of new entrants building canals with something approaching mania across the country. Side note: My home town of Birmingham actually has significantly more miles of canals than Venice. It’s cheaper sn doesn;’t have so many tourists either!
Looking at railways you got a similar dimensional impact as canals. You could reduce travel times from days to hours and the capital cost of the infrastructure was vastly cheaper as it was easier to lay steel rails than pipe water (for example look at the immense efforts that the Chinese have had to apply to shipping water from the South and West to the North and west in recent decades).
Is this becoming repetitive, the technology wasn’t the disruptive force. It was the horde of new entrants creating railway companies, defrauding their investors and laying track at a stupendous rate.
This is where the corporation starts to have a significant role. Not only did it fund these investments, but as it was realised that many of the railways were subscale (there was a 2 1/2 mile long railway in Birmingham from Harborne to Monument Lane) there was increasing consolidation from thousands, to hundreds to the big four and to eventual nationalisation.
Oil and Disruptive Business Models
Oil starts giving us a further understanding of how industry disruption works.
In all the cases so far the business model was simple. Invest in capital equipment and use it to deliver something faster and cheaper.
Watermills ground grain faster and cheaper freeing labour for additional crop raising
Printing presses copied books faster allowing more to be printed and knowledge and propaganda to be spread more easily.
Canals started the bulk movement of industrial good inland (coal had been shipped from Newcastle to London for centuries before this)
Railways moved people and goods even faster
Oil did lots of things. As an industry it was a lot more complicated. You had the oil wells, transporters, refiners and distributors.
Like the above industries it wasn’t the technology that was disruptive it was the thousands of new entrants who ripped up and polluted the US landscape.
Then you got the first really disruptive business model.
What happens if we integrate up and down the supply chain?
What happens if instead of just owning an oil well, of having a contract to move oil from A to B we expand our operations?
Let’s see if we can own everything?
And that is what Rockefeller and Standard Oil did. In 20 years he transformed the oil industry and the world. It was disruptive because he was seeing a different way of working. He had gone beyond the normal 5 forces in Porter. What he did was he took 4 copies of Porter’s diagram, one for each industry, stacked them on top of each other and created a new industry that no one else saw.
Let’s look at cars and hard disks?
Suprise suprise. It wasn’t the technology that cause the disruption. It was the thousands of new
companies that piled in to what they saw as a new area.
Disrupting the Car Industry
In the car industry Ford tried multiple times to create a car company that was profitable. He failed. There was just too much competition as thousands of other subscale operators tried to make cars.
His disruption was nothing to do with the car but how to make cars at scale and reduce their cost. It’s like he asked himself “How do I change the rules of the game?” Then he got out the business model canvas (not really) and pottered around a bit before coming up with the idea of mass production.
Disrupting Hard Disks
In hard disks what we saw was a wave of new entrants with every technological innovation. With every technological innovation the previous cohort of hard disk manufacturers was wiped out and it was only in the 4th or 5th generation that Western Digital and Seagate managed to achieve enough scale to avoid the same fate.
That’s a quick trip through history. There are plenty of other examples (Search, AI and ridesharing come to mind as well).
Winners Succeed with Business Innovation
In most cases the technology is clearly known and available to lots of actors. The actors then try with varying degrees of skill and luck to create big companies. The winners then are the ones who tend to succeed best at corporate innovation on a tactical level.
How do we do this better, faster, more effectively than anyone else?
Microsoft was one of many software startups at the time. It was the one that won with luck and good deal making.
What does it take to disrupt an industry or traditional business model?
If you want to disrupt a traditional industry you need:
· technological innovation, or
· significant social/cultural change, and
· widespread knowledge, and
· lots of new entrants, and
· innovative business practices that give you competitive advantage for long enough to scale.
The rules are different if you are disrupting at a smaller scale. A new medical device won’t disrupt the healthcare industry. It’s only disruptive if makes drugs, doctors or hospitals obsolete.
If that industry equilibrium is not challenged, if the roles of the players do not have to change radically it is not fundamentally disruptive.
That’s why Google and Uber are disruptive. Marketing agencies and taxi companies cannot continue to operate in the same way that they did before. Whatever happens to Google and Uber as companies that won’t change.
This is why I keep coming back to the Porterian idea of new entrants. A single disruptive company can be co opted by the existing market structure. Like a grain of sand the oyster of industry forms a pearl around it.
Disrupting an Industry Requires Mass Action
Disrupting an industry requires mass action. That’s why Schumpeter saw it as a wave. Individually all the new entrants are almost powerless. Together they have explosive power.